Vallejo General Hosp. v. Bowen, 87-1711

• Decision Date: 24 June 1988
• Docket Number: No. 87-1711,87-1711
• Citation: 851 F.2d 229
• Parties: , Medicare&Medicaid Gu 37,179 VALLEJO GENERAL HOSPITAL (now known as Sutter Solano Medical Center), Plaintiff-Appellant, v. Otis BOWEN, M.D., Secretary of Health and Human Services, Defendant-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 229

851 F.2d 229

22 Soc.Sec.Rep.Ser. 312, Medicare&Medicaid Gu 37,179

VALLEJO GENERAL HOSPITAL (now known as Sutter Solano Medical

Center), Plaintiff-Appellant, v. Otis BOWEN, M.D., Secretary of Health and Human Services,

Defendant-Appellee.

No. 87-1711.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Nov. 10, 1987.

Decided June 24, 1988.

Florence L. Di Benedetto, Hanson, Bridgett, Marcus, Vlahos & Rudy, San Francisco, Cal., for plaintiff-appellant.

Michael R. Power, Sp. Asst. U.S. Atty., Dept. of Health and Human Services, San Francisco, Cal., for defendant-appellee.

Appeal from the United States District Court for the Eastern District of California.

Before CHAMBERS, SKOPIL and POOLE, Circuit Judges.

POOLE, Circuit Judge.

Appellant Vallejo General Hospital ("Vallejo") appeals from the District Court's grant of summary judgment in favor of the Secretary of Health and Human Services ("Secretary") in an action challenging the Secretary's decision to disallow reimbursement for certain depreciation and interest costs Vallejo claimed with respect to assets acquired from another Medicare provider. We affirm.

I. BACKGROUND

Vallejo, now known as Sutter Solano Medical Center, is a non-profit hospital which provides services eligible for reimbursement under the Medicare program. In February 1979 Vallejo purchased the assets of Broadway Hospital, another Medicare provider, for $3,126,735. The purchase agreement contained an allocation schedule which divided the purchase price among seven groups of assets. This allocation schedule was developed by the seller and was added to the purchase agreement after the total price had been agreed upon.

The contract schedule allocated about 37% of the total purchase price to goodwill and other intangible assets which are not depreciable for Medicare reimbursement purposes. The remainder of the purchase price was allocated to equipment, land, buildings, and other improvements, grouped into six categories. Some categories combined reimbursable with non-reimbursable assets, without further breakdown.

Immediately following the purchase, Vallejo had the assets appraised. The appraiser valued the tangible assets at $4,301,235--substantially more than the total purchase price of $3,126,735, which included goodwill. Vallejo then allocated the total purchase price to the tangible assets only, according to the relative appraised value of those assets. No value was attributed to goodwill. Vallejo submitted its Medicare cost reports for the years 1979-82 using this allocation, rather than that set forth in the purchase agreement. These cost reports determined Vallejo's reimbursement for depreciation and interest costs associated with the acquired assets during the covered years. ¹

Vallejo's fiscal intermediary ² initially accepted the appraisal-based allocation in the cost reports, but it eventually reversed its position after the seller filed a cost report using the allocation set forth in the purchase agreement. When one Medicare provider sells an asset to another provider, Medicare instructions require that the amount used by the seller to determine gain or loss on the sale agree with the historical cost used by the purchaser to establish the depreciable basis of the asset. See U.S. Dept. of Health and Human Services, Health Care Financing Administration, Providers Reimbursement Manual, Part I, Sec. 104.14 (1987). Accordingly, the fiscal intermediaries for Broadway and Vallejo were required to attempt to resolve their conflicting positions. When they were unable to do so, the Health Care Financing Administration ("HCFA") Regional Office informed Vallejo's intermediary that it should substitute the allocation in the purchase agreement for the one provided by Vallejo and adjust the reimbursement accordingly. Vallejo's intermediary complied, reducing the reimbursement by $431,892.

Pursuant to 42 U.S.C. Sec. 1395oo (a), Vallejo appealed to the Provider Reimbursement Review Board ("PRRB") challenging the intermediary's decision. The PRRB concluded that Vallejo was bound by the allocation in the purchase agreement and that the intermediary's adjustment was correct. Pursuant to 42 U.S.C. Sec. 1395oo (f) the Deputy Administrator of HCFA reviewed the PRRB decision on his own motion, and affirmed. Vallejo then sought review in the district court. The district court entered summary judgment in favor of the Secretary, and Vallejo appeals.

II. STANDARD OF REVIEW

We review de novo a district court's award of summary judgment affirming a decision of the Secretary in a Medicare reimbursement matter. Phoenix Baptist Hosp. & Medical Center v. Heckler, 767 F.2d 1304, 1307,modified, 776 F.2d 877 (9th Cir.1985).

Pursuant to 42 U.S.C. Sec. 1395oo(f) we apply the standard of review applicable to actions arising under the Administrative Procedure Act. Review is limited to determining whether the Secretary's action was arbitrary, capricious, an abuse of discretion, not in accordance with the law, or unsupported by substantial evidence on the record taken as a whole. North Clackamas Com. Hosp. v. Harris, 664 F.2d 701, 704 (9th Cir.1980). In addition, we give deference to the Secretary's interpretation of his own regulations. St. Elizabeth Com. Hosp. v. Heckler, 745 F.2d 587, 592 (9th Cir.1984). However, the Secretary's interpretation "must sensibly conform to the purpose and wording of the regulations," id. (quoting Pacific Coast Medical Enters. v. Harris, 633 F.2d 123, 131 (9th Cir.1980)), and must be a reasonable construction of the words in light of their previous interpretation and application. Id.

III. GOVERNING REGULATIONS ³

Vallejo agrees that 42 C.F.R. Sec. 405.415(g)(1) establishes the total purchase price as an upper limit on the aggregate depreciable basis of the assets acquired from Broadway Hospital. This regulation provides in pertinent part:

(1) The cost basis for the assets of a facility purchased as an ongoing operation after July 1, 1966, and before August 1, 1970, shall be the lowest of:

(i) The total price paid for the facility by the purchaser, as allocated to the individual assets of the facility ...

Vallejo notes that this regulation does not specifically address the manner in which the price is to be allocated to individual assets. It argues that the manner of allocation is addressed in 42 C.F.R. Sec. 405.415(f)(2)(iv) as follows:

If a provider sells more than one asset for a lump sum sales price, the gain or loss on the sale of each depreciable asset must be determined by allocating the lump sum sales price among all the assets sold, in accordance with the fair market value of each asset as it was used by the provider at the time of sale. If the buyer and seller cannot agree on an allocation of the sales price, or if they do agree but there is insufficient documentation of the current fair market value of each asset, the intermediary for the selling provider shall require an independent appraisal expert to establish the fair market value of each asset and shall make an allocation of the sales price in accordance with the appraisal.

According to Vallejo, the manner of allocation is governed either by 42 C.F.R. Sec. 405.415(f)(2)(iv), or, in the alternative, by Generally Accepted Accounting Principles ("GAAP"), and both methods require allocation based on relative fair market values as determined by appraisal.

IV. DOCUMENTATION OF FAIR MARKET VALUE

Vallejo's argument rests largely on the provision that the seller's intermediary must call for an appraisal when there is "insufficient documentation" of the fair market value of the individual assets. 42 C.F.R. Sec. 405.415(f)(2)(iv). Vallejo understands this to mean that an allocation agreed to by the parties can be used only if there is documentation, independent of the agreement itself, showing that the allocation reflects the true economic value of the assets. It was stipulated that there was no such independent documentation in this case. Consequently, Vallejo believes it was proper to use the appraisal-based allocation in its cost reports.

The PRRB disagreed. It noted that fair market value is defined as "the price that the asset would bring by bona fide bargaining between well-informed buyers and sellers at the date of acquisition." 42 C.F.R. Sec. 405.415(b)(2). It found that the purchase agreement was a valid and bona fide contract which met the definition of fair market value. The PRRB then concluded that 42 C.F.R. Sec. 405.415(f)(2)(iv), on which Vallejo sought to rely in substituting the appraisal-based allocation for the contractual one, was inapplicable for two reasons. First, the contract was explicit in attributing fair market value to each asset sold and was the best evidence of fair market value. Second, only the seller's intermediary may invoke the provision for requiring an appraisal, and the intermediary accepted the contract allocation instead. In affirming the PRRB decision, the Deputy Administrator of HCFA found that 42 C.F.R. Sec. 405.415(f)(2)(iv) does not require an appraiser to document fair market value in cases such as this, because the sales price agreed to by the parties is the real market value. He explained that it is in the interest of both parties bargaining rationally at arms-length to evaluate accurately the property increments. In his opinion the Deputy Administrator wrote, "The parties have opposite competing interests in the allocation, just as they have in the price itself. If the specified value of a depreciable component is overvalued, the seller must suffer recovery of depreciation allowances by the Medicare program. If the asset is undervalued, the buyer has a lower historical cost basis and will receive a diminished level of depreciation from Medicare."

On appeal Vallejo argues that the Secretary's decision to permit the use of contractual values violated the language and purpose of 42 C.F.R. Sec. 405.415(f)(2)(iv), and was arbitrary, capricious and...